VIX Volatility Model - Model switches to SELL on February 29, 2016
The VIX Volatility Model (VVM) has switched to a SELL. This means to buy inverse ETFs such as SVXY, XIV, and ZIV. Price of XIV at the time email was sent: <opening price>
Futures have reversed higher on news China's central bank will monetarily ease further by lowering the amount of deposits banks hold in reserve by 0.5 percentage point due to liquidity shortage concerns. This naturally could prolong the current bounce in the markets, but the overall trend remains down.
Note, Market Direction Model (MDM) being a longer term strategy remains on a SELL as it still sees the overall trend as down. VVM, on the other hand, senses a short term advantage on a continuation of a short-lived bounce, thus is selling volatility. When such uncommon situations occur, it can serve as a hedge to smooth out volatility between the two timing strategies should one hold positions in both MDM and VVM. Of course, some prefer to employ one strategy over the other.
As I wrote to members, all signals are being sent to give members a feel for how the model works. In backtests, whipsaws can occur and whipsaw clusters can result where the model can get whipsawed more than once in a day, though this is a rare event. The losses for such whipsaws remain small compared to profits so testing has shown it is better to take all signals, and not try to predict whipsaws or whipsaw clusters.
Note, to avoid confusion, the signals are now in alignment with the VIX. When the VIX rises, the market usually falls, and vice-versa. Thus a BUY signal means to buy the VIX, meaning the model believes the market is heading lower. A SELL signal means to sell the VIX, meaning the model believes the market is heading higher.
When the model is on a BUY signal, buy ETFs such as VXZ (0.5x), VIXY (1x), VXX (1x), TVIX (2X), UVXY (2X). The model thus believes the general markets will move lower thus volatility will increase.
When the model is on a SELL signal, Buy any of ZIV (less volatile apprx 0.5x), SVXY (1x), XIV (1x). The model thus believes the general markets will move higher thus volatility will decrease.
Note, calling the Volatility Model a "model" is misleading as the algorithm is self-learning thus ever evolving with ever-changing price patterns. The same can be said for the Market Direction Model though it is self-learning at a much slower pace as it is designed to catch the major trends.
This information is provided by Virtue of Selfish Investing, LLC (VoSI) is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. VoSI reports are intended to alert VoSI members to technical developments in certain securities that may or may not be actionable, only, and are not intended as recommendations. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to VoSI, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Virtue of Selfish Investing, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2016 Virtue of Selfish Investing, LLC. All rights reserved.